President Trump: The NEW one and only politics thread

It really is an unfair comparison. The president of the US is not completely driving the ship on that. Central banks around the world are. When Obama entered office, we were dealing with a global credit crisis. In response, the Federal Reserve dropped the Fed Funds rate to zero and it launched QE1 (quantitative easing) and were into QE2 by this time in his presidency. It was unprecedented, reckless and sold out the future for a fantasy. Obama benefited from that fantasy. In that short period of time (the first 2 years or so of Obama's presidency), the Fed bought more than a trillion dollars in mortgage-backed securities and US treasury bonds, which was the same as throwing a huge amount free money (in the form of credit) at banks -- which they turned around and flooded risk asset markets with. That started the process of blowing asset bubbles all around us -- the most noticeable place for most people being the grind higher in stock prices as the Fed destroyed all price discovery. Many US equities got very divorced from the value of their actual earnings because of the warped incentives the Fed created.

The place that Obama actually had an impact was in the huge (and wasteful) spending bill that Congress passed, and which he signed, which created a lot of government debt and created phony economic activity that juiced the stock market. That fiscal juice also helped blow the bubble yet more. It was a perfect storm of phoniness. It continued throughout the Obama presidency, with short-term rates pinned at zero, which in real terms meant that safe savings vehicles had negative yields (you were being robbed if you wanted to save), and which forced savers to take on more and more excessive risk and rewarded reckless debt creation. At the same time, the Fed kept buying up treasuries and asset-backed securities, blowing their balance sheet up to about $4.5 trillion dollars. That drove down interest rates all along the yield curve -- again, forcing anyone who wanted to save to take more and more risk to get any return. And voila. ... savers punished, debtors rewarded (and debt levels exploded). ... and a stock market bubble, among other consequences.

Cut ahead to Trump entering the presidency. The Fed had kept the Fed Funds rate pinned at zero all through Obama's presidency, only getting in one 25 basis point (a quarter of a percent) hike at the end of 2015, and one right after Trump was elected in 2016 as Obama was leaving office. It has gotten in another 7 quarter point hikes since then. That has made the cost of money rise, and it has had a tightening effect on equity markets. At the same time, the Fed stopped buying up bonds via its quantitative easing, and at the end of 2017 slowly started to let expiring bonds on the massive balance sheet they built expire. It is now having the opposite effect of what Obama benefited from. Whereas they flooded risk asset markets with artificial liquidity for 8 years while Obama was president, basically spiking the punch bowl for the party, what they are doing now is slowly draining that liquidity out.

What held off equity markets deflating earlier (and I have been surprised at how intentionally blind markets have remained) was, 1) The 8 to 9 years of that kind of extraordinary manipulation of our asset markets really destroyed the pricing mechanism. People were conditioned to think there was a "Fed put." That they will always step in with freshly printed money to keep inflating the bubble. People have been waiting for them to panic and reverse course. Why? Because this happened several times while Obama was president. They stopped injecting liquidity, the bond market had a tantrum, and they (under Janet Yellen) reversed course and talked the markets down. Like scared children. On Wednesday, Jay Powell actually showed some backbone and didn't do that. He thumbed his nose at the tantrum. Also. ... 2) Trump succeeded in passing a giant tax cut bill in his first year, and at the same time they increased government spending by a lot. That combination of fiscal "stimulus" picked up some of the slack for the decreasing monetary stimulus, as the Fed continues trying to undo the quagmire they created. We got a blast of short-term fiscal stimulus which did a little bit to distract from the start of monetary tightening.

Now that the sugar high from Trump's fiscal stimulus has begun to wear off. ... all we are left with now is the Fed increasing the Fed Funds rate in halting 25 basis point increments (and we are still hundreds of basis points below where bank-to-bank lending rates would be if a market were pricing the risk instead of them having commandeered that market) and at the same time they are now letting $50 billion of bonds a month roll off of their balance sheet in an automated way. And markets are freaking out now that there is realization that the "Fed put" no longer is there. You can say the effect of what they are now doing (which was going to be a shock no matter who was president) has been magnified, because at the same time the buyer of last resort that was propping up the treasury market is stepping out, we are running our biggest deficit ever, which means the treasury has to sell more bonds -- and the Fed is no longer sitting there with freshly printed money (which is just monetary inflation) to buy up the bonds at overvalued prices. It is starting to create turmoil in lending markets, which is now beginning to show everyone who is swimming naked. i.e. -- they created a very serious leveraged mess.

In any case, to do a simplistic, "The stock market was up X under Obama, but only Y under Trump" without looking at the mechanism that caused that is unfair. Obama got 8 years of crazy debt monetization beyond anything the world has ever seen. Trump walked in at the end of that party, when the payback is starting. He never stood a chance

Of course, Trump is an absolute moron who tied himself to the bubble (when the market went positively euphoric after the tax bill on the sugar high of the temporary fiscal stimulus) tying himself to the performance of some stock indexes -- trying to take credit for what he cluelessly didn't understand was the blow off top of the bubble that the Fed stupidly engineered. He was clueless, although not so clueless that he hasn't turned on the Fed chairman, trying to set him up as the fall guy. So I don't have much sympathy for him. But it's sad that people have so little understanding of how destructive the Federal Reserve is, that blame for what is coming (and we have seen nothing yet -- we need a serious deleveraging and bad debt permeates way more things than US equities and this is going to be very painful) isn't assigned where it belongs. They engineered an extreme amount of monetary inflation, and all we got for it was temporary asset price inflation and a lot of bad debt. There is a price to pay for that. And people will simplisticly blame Trump. But the seeds of what is coming were laid in 2008, not 2018.